Explainer | What are ETFs? How have they become the new darling of investors globally?
- The popularity of ETFs can gauged from the fact that these products raked in US$800 billion in new funds last year, taking the total invested to US$11.5 trillion
Exchange-traded funds (ETFs) have quickly won favour among investors globally in recent years, with many choosing the passive investment product over actively managed ones because of lower costs and convenience in trading.
Investors continue pouring money into ETFs despite a challenging investment landscape, including entrenched inflation and a flare-up in geopolitical tensions.
China is no exception to the trend, with ETFs even becoming a key channel for state-backed funds to prop up the market. Inflows into ETFs linked to the underlying CSI indices of small and big-capitalisation stocks have seen spikes since early this year in an increasing sign of state buying to revive confidence in the broader market.
What is an ETF?
An ETF is a type of passive investment product that typically tracks a basket of assets such as stocks, bonds, currencies, commodities and even futures contracts. Just like ordinary shares, an ETF can be freely bought and sold on stock exchanges during trading hours, an advantage over traditional mutual funds, which investors can only buy or sell once a day after the end of the day’s trading.
Most ETFs are index-based and they mimic the composition and the performance of a specific gauge, such as the S&P 500 Index or the Hang Seng Index. The first ETF was launched in 1993 in the US, and after three decades of development, the total assets under management (AUM) of ETFs globally stood at US$11.5 trillion at the end of 2023, according to PwC.
Globally, ETFs recorded inflows of US$800 billion last year, while a similar amount was withdrawn from mutual funds.
BlackRock, Vanguard and State Street are the world’s top three managers of ETF products, accounting for about two-thirds of the market.
